(EDITORIAL from the Korea Herald on Jan. 23)

Debt, more debt

Korea's sovereign debt shot up from 309 trillion in 2008 won to more than 360
trillion won last year. The increase was alarmingly steep. Still, this should not
come as a surprise, because the government had no other way than to borrow and
spend its way out of the worst economic crisis since the Great Depression.

The expansionary fiscal policy, together with the loosened monetary policy,
successfully steered the nation away from the brink of a recession last year. Now
the government is looking forward to restoring growth momentum to pre-crisis
levels, aiming at expanding gross domestic product 5 percent this year.
It goes without saying that the high level of sovereign debt should be a cause of
concern to the public. But the public should pay greater attention to whether or
not the government will be able to put its growth under control.
Debt cannot be curbed at the current level just because the crisis is over now.
Many of the big-ticket projects that were launched as a means to overcoming the
crisis need funding for some years to come. But the government cannot immediately
increase revenues by a margin large enough to finance them without incurring any
more debt.
If government projections are correct, sovereign debt will near 500 trillion won
in 2013. The debt as a percentage of GDP is projected to rise from an estimated
34 percent this year to 37.6 percent next year. The government promises to
balance its budget by 2014.
But that will be easier said than done, given that politicians are eager to
launch monumental projects out of ego and pride. They also seek to start costly
projects to curry favor with the electorate, especially at a time when elections
are coming around.
When they are under mounting pressure to balance the government budget, governing
politicians tend to seek an easier way out of this predicament, forcing
corporations under the control of the government to finance their pet projects.
One such case involves Land and Housing Corp., which is set to spend as much as 8
trillion won on President Lee Myung-bak's four-river restoration project this
year.
In fact, the snowballing debt owed by government-run corporations and
semi-government agencies, such as Korea Housing Finance Corp., is another cause
of grave concern. It is little different from sovereign debt, given that it is
taxpayers that will ultimately have to hold the bag if any of them should go
bankrupt.
Indeed, the government is planning to put their debt into the sovereign-debt
category, beginning in 2012. Were the government's debt and that of the 297
government-controlled corporations and agencies - standing at 377 trillion won at
year-end - to be added to government debt, the total would amount to 743 trillion
won now. That would be roughly equal to 75 percent of GDP.
At such a high level, any European country would be easily disqualified from
joining the European Monetary Union, given that one of the conditions for
participation demands that the gross debt total of the general government should
not exceed the reference value of 60 percent of GDP.
Another serious debt problem concerns households, whose outstanding debt amounted
to 712 trillion won at the end of the third quarter of last year, or 68.3 percent
of their disposal income in the one year ending at the end of September. The debt
as a percentage of the disposable income was at a historic high, up 2.5
percentage points from a year before.
If deleveraging is the keyword for highly indebted government-controlled
corporations, so it should be for the households that are sitting on a ticking
time bomb. For its part, the government will have to curb its debt growth, making
good on its promise to balance the budget by 2014.
(END)

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